Does innovation stimulate performance? The case of small and medium enterprises in regional Australia

Researchers have mostly estimated the performance–innovation nexus as a one‐way relationship at macro levels. However, the possibility of reverse causality has not yet been given the attention it deserves. In this study, we consider the adoption of information and communication technology (ICT) to innovate processes, products, marketing and organisations among small and medium enterprises (SMEs) in the Western Downs region of Queensland, Australia. We employed a simultaneous equation model to capture the joint determination. The results indicate the existence of a feedback effect on the performance–innovation relationship. Specifically, the effect of innovation can be attributed to marketing and organisational innovation. The use of ICT strategies and the Internet for business purposes have a significant effect on the performance of SMEs. A change mindset is also strongly related to using the Internet to search for business opportunities, while mindset and usage have some effect on innovation, particularly when the performance is not endogenous. Finally, the agricultural sector is found to lag in performance and innovation relative to the non‐agricultural sector. Previous models might have misspecified the performance–innovation relationship because the simultaneity bias was not accounted for; a situation that could mislead policy decisions. This study provides new empirical evidence on location‐specific research for strategic interventions.